EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

The Energy Tax Aspects of Discount Retail Stores

The discount retail sector has been experiencing rapid growth which has
actually accelerated during the economic downturn. In many shopping centers,
discount retailers have assumed the critical anchor store role, as neighborhood
supermarkets have been replaced by larger, stand alone big box retailers. By
stepping into the available anchor store position during a weak commercial real
estate market, discount retailers have the market leverage to obtain very
favorable lease terms. After they secure the store space at reduced prices,
discount retailers also have the leverage to use their increasing scale to
obtain volume pricing for lighting and HVAC upgrades to obtain substantial
reductions in energy operating costs. With proper tax planning major tax
incentives are available to further support these already desirable
objectives.

If the building project doesn't qualify for the maximum $1.80 per square
foot immediate tax deduction, there are tax deductions of up to 60 cents per
square foot for each of the three major building subsystems: lighting, HVAC and
the building envelope. The building envelope is every item on the
building’s exterior perimeter that touches the outside world including
roof, walls, insulation, doors, windows and foundation.

The following chart illustrates the potential total EPAct tax deduction for
several prominent discount retail chains:

1store square footage based on average store size of 7,100 square feet

2store square footage based on average store size of 16,600 square feet

Discount Retail Store Tax Planning

Lighting

Building lighting comprises a large portion of retail store energy use. Most
retail stores that have not had a lighting upgrade to energy efficient lighting
in the last 7 or 8 years utilize prior generation metal halide or T-12
fluorescent lighting. It is also important to realize that effective January 1,
2009, most probe-start metal halide lighting may no longer be manufactured or
imported into the United States; and, effective July 1, 2010 most T-12 lighting
may no longer be manufactured or imported into the United States. This means
that retail stores that still have this lighting technology will soon be
subject to large price increases for replacement lamps and bulbs.

This prior generation T-12 and metal halide lighting is very energy
inefficient compared to today's LED lighting, and a lighting retrofit can
easily reduce lighting electricity costs by 40 to 60 percent. The following
chart shows when EPAct tax savings are applicable for typical discount retail
store spaces:

It is widely presumed that virtually all buildings will eventually be
converting to LED lighting. Many multi-location retailers are beginning the
conversion now. Discount store facility managers should consider testing
alternative LED lighting solutions at this time. For example, one retailer with
over 800 locations recently tried LED applications in 10 beta locations before
upgrading all locations. The best economic payback will come from those
locations with high electricity rates and large utility rebates. For example,
Connecticut is offering 50% rebates for the installed costs of LED and
induction lighting.

HVAC

Discount retailers should take their most efficient store, combining the LED
lighting discussed above, and the most efficient HVAC and have it modeled using
IRS approved software to see if it qualifies for multiple EPAct tax deductions.
With this approach, they could plan into $1.20 to $1.80 EPAct tax deductions
for every store retrofitted to that energy efficiency level or better on or
before December 31st, 2013. If they have any existing LEED (Leadership in
Energy and Environmental Design) stores, they already have a store that has an
energy simulation model and it could quickly be evaluated to see if multiple
EPAct tax deductions are in the offing. For example, Family Dollar has a LEED
certified store in Spartanburg, SC and Aldi has one in Ann Arbor, MI. This
gives these organizations an advantage. These companies should first determine
whether existing LEED models already qualify them for tax savings.

Distribution Center Tax Savings

Discount retail chains can also obtain large immediate EPAct tax deductions
by retrofitting their distribution centers and warehouses. In addition to
retrofitting lighting, installing new energy efficient Cambridge heating
systems can provide energy cost savings of eight percent or more over the
ASHRAE 2001 building code standards. There are multiple heater technologies
suitable for the distribution center market, including direct fired gas
heaters, unit heaters, and infrared (radiant) heaters. If feasible the heater
should be mounted on an exterior wall to optimize the roof top solar P.V.
space. As can be seen by the following chart, some of the retailers mentioned
above have very large amounts of distribution center space that are potential
candidates for EPAct deductions:

Conclusion

Discount retailers have become a very important property category that has
recently experienced a large increase in store units. Even though the sector
has enjoyed a period of success and growth during the recent economic downturn,
building managers and owners need to closely manage all costs including energy
cost and maintenance costs. Energy reduction investments are a great way to
keep costs down in the long-term while receiving immediate tax deductions in
the short-term. Installing energy efficient equipment, combined with the
appropriate tax planning, will be a key for continued success in the discount
retail sector.